From the Virginia Society of Certified Public Accountants - Presented
by Dean Knepper, CPA, CFP®

UNDERSTANDING THE HOME OFFICE DEDUCTION CAN LOWER YOUR TAX BILL

(July 1, 2007) -- One of the many benefits of working from home is the home-office
deduction. Home-based workers who qualify get to deduct a portion of their expenses
related to operating an office in their home. However, the rules covering the
home office deduction are complex. Here, the Virginia Society of CPAs offers
an overview.

Regular and Exclusive Use

To qualify for the home office deduction, there are two major tests you must
meet. The first requirement is that you use your office regularly and exclusively
for business. Regularly means that you use it often — not necessarily
every day, but occasional or incidental use doesn’t qualify, even if the
room is used solely for business.

Exclusively means that you must use the space you designate as your home office
for work only — which means any non-business usage of the room will disqualify
the home office deduction. The only exception to the exclusivity rule applies
to running a daycare center in your home or using a part of your home to store
inventory or product samples.

Principal Place of Business

Another requirement is that your home office be used either as a place of business
to meet with clients, customers or patients in the normal course of business
or your principal place of business. Your office will qualify if you spend most
of your working hours there and most of your business income is attributable
to your functions there.

The home office will qualify as your principal place of business if 1) it is
used regularly and exclusively for business, administrative or management activities
and 2) you have no other fixed location where you can do a substantial amount
of this administrative work. Examples include calling customers and clients
to set up appointments, billing of customers and clients, keeping books and
records, and calling vendors to purchase supplies.

Special Rules For Employees

If you’re an employee who works from a home office some or all of the
time, you must meet an additional hurdle. To qualify for the deduction, the
use of a home office must be for the convenience of the employer. An example
of this scenario would be the employer who does not have or provide office space
for the employee. Employees who work from home a few days a week to take advantage
of the company’s flexible workplace option are not eligible to take the
home office deduction.

Determining What’s Deductible

When you work from a qualified home office, you can fully deduct expenses that
are exclusively for your home office, such as equipment, decorating, and supplies.
You may also deduct a percentage of indirect expenses that relate to your residence
including mortgage interest, property taxes, utilities, homeowners insurance,
general maintenance and repairs, and depreciation.

Generally, the amount you can deduct depends on the percentage of your home
that you use for business. The safest method is to divide the total square footage
of the house (not counting an unfinished basement or a patio) by the square
footage allocated to the business. If your house is 2500 square feet and your
office takes up 250 square feet of that space, then 10 percent of your indirect
expenses would be deductible. Keep in mind that the amount of your home office
deduction cannot exceed the net income from the business.

Claiming the Home Office Deduction

If you are self-employed, you use Form 8829, Expenses for Business Use of your
Home, to compute your home office deductions and then you report the deduction
on Schedule C. Qualifying employees must treat their home office deductions,
calculated on Form 8829, as miscellaneous itemized deductions, which are deductible
only to the extent that they exceed 2 percent of adjusted gross income.

A CPA Can Help

CPAs say that establishing proof of your home office can help in the event
you are audited. You can do that by using your home office address on your business
cards and stationery, taking photos of your office, and installing a phone line
there. Working with a CPA can help in establishing a home office that meets
IRS qualifications and in claiming the deductions you deserve.

The Virginia Society of CPAs is the leading professional association
dedicated to enhancing the success of all CPAs and their profession by communicating
information and vision, promoting professionalism, and advocating members’
interests. Founded in 1909, the Society has nearly 8,000 members who work
in public accounting, industry, government and education. This Money Management
column and other financial news articles can be found in the Press Room on
the VSCPA Web site at www.vscpa.com.